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Physiocracy: A viewpoint of the role of agricultural production in a macroeconomic system

Ronald A. de Yong The University of Montana

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Physiocracy : A Viewpoint of the Role of Agricultural Production in a Macroeconomic System

by

Ronald A. de Yong

Presented in partial fulfillment of the requirements for the degree of Master of Arts University of Montana 1994

Approv^ by ^

Chairman, Board j^f Examiners

Dean, Graduate School

Date

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. de Yong, Ronald A., M.A., March 1994 Economies

Physiocracy: A Viewpoint of the Role of Agricultural Production in a Ms^c^oeconomic System

Director: Michael Kupilik This is a study of the economic philosophy of physiocracy from its discovery in France in the 1700s to the present. The contributions of several 18th and 19th century economists influenced what could be called 20th century physiocracy. Further research in the area of physiocracy was done by an accountant named Carl Wilken in the 1930s. Premises of 20th century physiocracy were incorporated into agriculture policy in the United States in the 1940s. This policy was called parity economics. Examination of agriculture policy in the United States from World War I to the present provides the context for examining parity and non-parity policies that have developed in attempts to achieve adequate food supplies at fair prices for both consumers and producers. Parity programs provide the mechanism for 100 percent parity, based upon the ratio of prices that producers receive for their products, to prices that they pay for their inputs, using either the base years 1910-1914 or 1946-1950. These base years have historically been chosen because of the economic prosperity that the United States experienced in those time frames. Parity was generally achieved from 1910 to 1919 and also from 1942 to 1953, with the latest period being achieved with specific legislation designed to accomplish parity. A cheap food program, which in more recent years has been referred to as an export program, has been the policy used in those years when 100 percent parity was not the goal. This is the basic program in existence today, which is up for renewal or change in 1995.

This study further examines the differences between these two basic models based upon an econometric model developed by the Food and Agricultural Policy Research Institute (FAPRI). The model reveals dramatic differences in producer incomes and government costs, as well as minor differences in consumer costs. The author uses Wilken's hypothesis to expand the FAPRI model with an analysis of national earned income that results from each program. The consequences that less than adequate national earned income has on private and public debt accumulation is also examined, again according to Wilken's hypothesis.

ii

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Economie Reports of the President: of the United States and Economic Indicators compiled by the U.S. Government are the main sources for the empirical data used.

List of Tables

Table 1 : WHEAT .... 68

Table 2 : CORN .... 69

ili

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My father, Henry de Yong, was a farmer who read and

understood history as it evolved. I thank him for his

inspiration and my mother Sylvia for her openness and sense

of humor. My wife Dee and my three children must be

applauded for their support during a very busy time of our

lives. I would also like to thank Helen Waller, A1 Schmitz,

Mark Ritchie and Doug Young for their generous help in

finding support materials. Committee members Michael

Kupilik, Ron Dulaney, and Myles Watts spent many hours

reading my thesis, offering excellent advice. Their efforts

are greatly appreciated. I am also in debt to many people

too numerous to mention that gave support and guidance.

Author's Background

B.S. in Agriculture Science from Montana State University

B.A. in Philosophy from Montana State University

Assistant Supervisor for Farmers Home Administration

Program Specialist for Agriculture Stabilization and

Conservation Service

Economics instructor at Flathead Valley Community College

Own and operate a family farm

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Table of Contents

Abstract ...... ü

List of Tables ...... i ü

Acknowledgments and Author's Background ...... iv

Table of Contents ...... v

1. Early History of Physiocracy ...... 1

2. Failure of the Market to Self Regulate ...... 11

3. Society Determines Distribution ...... 18

4. Producer Income ...... 23

5. Consumer Income ...... 25

6. Earned Income versus D e b t ...... 29

7. U.S. Farm Policy: Depression to World War II . . . .34

8. Post World War I versus Post World War I I ...... 46

9. Recent Farm Policy: Decline of Parity Concept . . . 51

10. Farm Policy Today: Export Emphasis ...... 64

11. Problems with Present Policy ...... 78

12. Parity Program versus Present Program ...... 81

13. C o n c l u s i o n ...... 88

14. Bibliography ...... 90

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Chapter 1

Early History of Physiocracy

This is an examination of a paradigm that was first

expressed by Francois Quesnay, a physician in the court of Louis XV and personal doctor to Mme. Pompadour.^ Inspired by William Harvey's discovery that blood circulates in the human body, Quesnay hypothesized that wealth originated with

production from the land and then flowed from hand to hand with trade transactions providing income for the nation.^

A belief that agriculture is the first and primary step to survival has philosophical roots dating back to the

domestication of plants and animals. There was no need to question this basic premise or even expand upon it until the market system had essentially replaced traditional and

authoritative systems of organization. The emergence of

national political units and the growth of national loyalties and spirit, in combination with increased

^Robert L. Heilbroner, THE WORLDLY PHILOSOPHERS (New York: Simon and Schuster, Inc, 1986) 49.

^Ryan C. Amacher, PRINCIPLES OF MACROECONOMICS (Cincinnati: South-Western Publishing Co., 1992) 48.

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participation in the market system, raised the question of

how a nation becomes wealthy. Mercantilism dominated eighteenth century economic

thought with the basic premise that accumulation of gold and silver through any means necessary was the route to national

wealth. English, Spanish and Portuguese adventurers sailed to unknown lands seeking great riches for themselves and their countries. Exploitation of the accumulated riches of

societies in the New World was equivalent to winning a

national lottery. The prevailing sentiment in Europe at this time was that a nation could become wealthy in gold and

silver with government involvement in economic activity,

especially in international trade. International trade was manipulated to provide cheap raw material imports and to cause imported manufactured

goods to be more expensive. Exports in finished

manufactured goods were encouraged while population growth which kept wages low was deemed beneficial. Thomas Mun

discovered the Achilles heel in this policy as early as 1630, with the revelation that an increase in gold and silver causes domestic prices to increase which eventually turns the balance of trade against the nation acquiring the

bullion. John Locke reiterated this argument in the 1690s,

writing that prices vary in definite proportion to the

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. quantity of money in circulation.^ Contrary to these arguments, economic activity in the 18th century was still

viewed as a zero-sum game where one country^ s gain was another country's loss. Arguments that were advanced to

solve the price dilemma and support the concept of mercantilism included John Law's Money and Trade Considered (1705) . Law's writing indicated that a highly elastic commodity supply curve would allow for an increase in prices to be accompanied by a large increase in goods offered. Labor that was previously idle would be employed to produce this increased quantity of goods giving rise to new consumer demand. Increases in bullion or money would translate into increased quantities of goods supplied and demanded more readily than into increased prices. Cantillon's Essay on the Nature of Commerce, written in the 1720's but published

in 1755, explores this mercantilist dilemma further. The

nature of the injection of additional money determines the

effect on the level of prices and the quantity demanded,

according to Cantilion. The differential effect of this

injection, sometimes referred to as the Cantillon Effect,

was reproduced by Hume in his essay On Money (1752) . An

example that Cantillon gives us is that an increase in money

due to an export surplus expands output and effects price

increases much less than increased production in gold mines

^Mark Blaug, ECONOMIC THEORY IN RETROSPECT (New York: Cambridge University Press, 1978) 13.

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at home. Both instances increase demand but apparently in

the first instance we are dealing with an elastic supply

curve and in the second instance an inelastic supply curve.

The dilemma is still not resolved if the supply curve is

inelastic, but Cantillon stated, the comparative power and wealth of states consists, other things being equal, in the greater or less abundance of money circulating in them... and that... every state which has more money in circulation than its neighbor has an advantage over them so long as it maintains this abundance of money.'* This statement still ignores the fact that a nation drained of bullion will have a fall in prices which will turn the balance of trade in their favor. The mercantilist policies of Colbert during the reign of Louis XIV had left French agriculture in dire circumstances. The great majority of French peasants possessed very small pieces of land on which they had to pay

seigneurial dues as well as a multitude of taxes.^ Cultivation of their land plus hiring out their labor provided only a wretched existence. Another group of

peasants possessing larger acreages and some capital were able to live more comfortably on the cultivation of their

property. These farmers, who were actually able to exercise

entrepreneurial functions, were known as fermiers. Quesnay

^Ibid, 21.

^Ronald L. Meek, THE ECONOMICS OF PHYSIOCRACY (Boston: Harvard University Press, 1976) 19.

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and the physiocrats believed that the removal of practices

that exploited agriculture, such as the unfair tax system in

France at the time, would allow the flow of capital to

agriculture to increase and convert France from small-scale, capital-starved subsistence farming to a more prosperous

fermier system.®

The physiocrats rejected the mercantile system, also

referred to as a system of commerce, in favor of a system of

agriculture to increase a nation's wealth. They did not believe that exploitation through commerce was the desired path to national wealth. The physiocrats, which translated means "rule of nature," believed that natural law mandated the accumulation of wealth only through the harvest of

agriculture products which nature provided. Exploitation of gold and silver from the New World provided only short term

riches that eventually were exchanged for necessary production from the land. For example, Spain was the leader in exploiting New World riches but was unable to maintain

its superior position when it exchanged gold and silver for production from outside the country. Gold and silver were

not real wealth, but simply facilitated the exchange of real

wealth that agriculture annually produced. Agriculture has the ability to yield a disposable surplus over necessary cost which Quesnay called net product.^ The productive

®Ibid, 25. ^Ibid.

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capacities of nature, where one planted seed may yield forty

to one hundred seeds and livestock can reproduce, provide the mechanism for net product to occur. Economic activity rises and falls with increases and decreases of net product. The theoretical system of the physiocrats used the word "productive" only in the context of "productive of a net product." By contrast, manufacturing and trade were called nonproductive or sterile because they created no new net

product but simply transformed it. Net product from production was the source of wealth and reduction of this production in monetary terms was like a loss of blood in the body's circulatory system and cause for alarm. Quesnay was

the first economist to describe economic activity as a circular flow where production and consumption are mutually

interdependent variables that follow socially determined laws with the cycle being repetitive.® Quesnay's Tableau Economique, published in 1758, graphically showed the interdependence between three interlocking classes, the

farmer, the landowner, and the so called sterile class of manufacturers and merchants. However, as Mark Blaug states in Economic Theory in Retrospect.

the conclusions of physiocratic theory are not deducible from the Tableau, on the contrary, they form the premises upon which the zigzag diagram of the stationary process is constructed.®

®Amacher, PRINCIPLES OF MACROECONOMICS, 48. ®Blaug, ECONOMIC THEORY IN RETROSPECT, 26.

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The physiocrats major contribution to the developing

economic system was the observation that the economy had a natural beginning with production of a net product from the land. A second observation was that the income received

from this production flowed through the rest of the economy.

The whole system operated naturally without government

interference. This advocation of a policy of laissez-faire

was distinctly different from the commonly held viewpoint that governments should manipulate trade to their advantage. Development of these premises elevated Quesnay to the rank of leading economic thinker in France at that time. England also had a great economic thinker in Adam Smith. Smith had accepted employment as a tutor to Lord

Townsend's step-son and in those days an adequate education

demanded a trip to the continent. During his stay in Paris, Smith and Quesnay had ample opportunity for detailed

discussions. Smith realized that the physiocratic system had imperfections, however he was able to state that it was

"perhaps the nearest approximation to the truth that has yet

been published upon the subject of Political Economy."

Physiocratic premises that he favored included

laissez-faire, especially in regards to international trade, and production and distribution moving in a continuous

circular fashion. Adam Smith had difficulty with the

physiocratic belief that agriculture alone produced true

wealth and that manufacturing and trade merely changed that

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original production in a sterile way. There was no disagreement that labor working in agriculture provided new wealth by harvesting production from the earth, but Smith

believed that transformation and trade of the initial production also increased the nation's wealth. Smith

condemned Quesnay for attempting "to degrade the artificers, manufacturers, and merchants by the humiliating appellation of the barren or unproductive classes." However, Blaug mentions that Smith misrepresents the notion of the sterile class since "the physiocrats did not regard industry as useless but simply as a sector that produces no net

additions to income." Blaug also points out that in the end he (Smith) was forced to argue that manufacturing is productive because its receipts are sufficient to pay wages and to replace worn-out capital, but that agriculture is more productive because it yields rent over and above wages and depreciation. But apart from a quibble on words, this concedes the whole of the physiocratic argument. The failure of the physiocrats to adequately address

contributions made to national wealth by non-agricultural

sectors forced them to play a minor role in future economic thinking. Even with their disagreements Adam Smith was so

impressed with Quesnay that he would have dedicated his

book. The Wealth of Nations, to him had Quesnay not died

prior to its completion 12 years later in 1776.“

^°Ibid, 25.

“Heilbroner, THE WORLDLY PHILOSOPHERS, 50.

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England during Adam Smith's lifetime was building an

empire based upon trade policies that exploited the

production of other nations, providing cheap raw materials for her industries, consequently England felt that trade was

the source of national wealth. Adam Smith, however believed

that agriculture was a principle source of Britain's wealth and thus agriculturally related topics permeated The Wealth of Nations. In Book III, Chapter 1, "Of the Natural

Progress of Opulence," Smith states The cultivation and improvement of the country, therefore, which affords subsistence, must necessarily, be prior to the increase of the town, which furnishes only conveniency and luxury. Smith agreed with the physiocrats that agriculture was a first and necessary step in the economy, and stated that the exploitation of agriculture, through the price mechanism, by manufacturing was harmful to the entire system. Harm could

also result if agriculture was allowed to impose restraints upon other employments such as manufacturing and trade. In

Book IV, Chapter IX, "Agricultural Systems," Smith indicates that a necessary balance is needed and will occur naturally when he states.

It is thus that every system which endeavours, either, by extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would

^^Adam Smith, THE WEALTH OF NATIONS (New York: Random House, Inc., 1937) 357.

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otherwise be employed in it; is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of the society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour. Self interest and competition would automatically secure the proper balance between the various forms of employment through a system of self regulation which Smith called the

"invisible hand." The physiocrats and Smith though disagreeing on the source of wealth did agree on a policy of laissez-faire. They both believed that in the natural

course of events, unhindered by government the market would allow civilization to develop to the benefit of the common man. Later economists, especially David Ricardo and Thomas

Malthus, did not share Smith's optimism that a natural balance would occur.

""Ibid, 650-651

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Chapter 2

Failure of the Market to Self Regulate

England had adopted the enclosure system to a much

greater extent than France and consequently large aristocratic estates formed England's agriculture base in the 19th century." The landowners were rich, powerful, and controlled the political process of government. David Ricardo, a stock broker, was concerned that profits earned by the landowners were not invested back into production, as the new industrialists tended to do, but instead were squandered by the rich landowners. The price paid for foodstuffs was extremely important to Ricardo since he believed that England's economic system favored the

landowners. In 1815, Ricardo wrote, "The interest of the landlords is always opposed to the interest of every other class in the community.

The fact that income from production can be harmful if it is

too great contradicts the concept of early physiocracy.

Also the idea that this increased income will not necessarily flow to areas where it is most productive contradicts Smith's self regulating markets.

^^Blaug, ECONOMIC THEORY IN RETROSPECT, 25.

^^Heilbroner, THE WORLDLY PHILOSOPHERS, 82.

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Later physiocratic arguments presented by Carl Wilken,

an accountant in the United States during the 20th century,

expanded upon Quesnay's and Smith's original observations.^® Wilken agreed with the physiocrats that real wealth was only created with production from the land

and that the income generated from harvesting this new wealth circulates through the economy. Wilken also agreed

with Adam Smith that division of labor increased a nation's

wealth. However, contrary to Smith, Wilken recognized that the market could fail to self regulate as it did during the Great Depression. Wilken contended that this was due to a reduction in income to agriculture and other harvesters of raw materials, at the beginning of the economic cycle. He proposed that the proper balance must occur between income

earned from production of raw materials at the beginning of the cycle and the income earned by all the other sectors, just as Adam Smith had proposed earlier, but Wilken did not believe that this would occur naturally. Consequently,

agriculture prices that were too low in comparison to other

sectors of the economy created problems during the 1930's

and agriculture prices that were too high relative to other sectors, such as labor, created problems in England in the early 1800's.

^®Charles Jr. Walters, UNFORGIVEN (Kansas City: Economics Library, 1971).

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Ricardo and Wilken both agreed that Adam Smith's

assumption that markets would always self regulate to the benefit of the common man was incorrect. The proper balance between different sectors of the economy is necessary as

Smith suggested but it was not automatic through natural

processes. Ricardo and Wilken lived under two entirely

different sets of economic circumstances. England, at the

time of Ricardo, had a few wealthy landowners with tremendous political power to skew the terms of trade within the country in their favor. The infamous corn laws that the

landowners had legislated allowed wheat prices to reach a peak in 1813 of approximately 14 shillings per bushel, which was equal to nearly twice a workman's weekly wage. By comparison, the price of American wheat reached a peak in 1920 of $3.50 per bushel when weekly wages averaged $26.00.’-^ Prices for agriculture products in the United

States had dropped so dramatically by the 1930's that farmers were dumping milk down drains, destroying livestock,

and burning corn for fuel. In both instances the market had

failed to self regulate and the balance was distorted, first with agriculture prices that were too high in Ricardo's time and then with agriculture prices that were too low in Wilken's time.

17 Heilbroner, THE WORLDLY PHILOSOPHERS, 80-81

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Ricardo would have been surprised that the scenario of

the Great Depression could take place due to low agriculture

prices. One of the few areas that he and his good friend Thomas Malthus agreed upon was that population has the potential to increase geometrically while food production

potentially increases only arithmetically^ causing a problem with population growth. As the population expands, increasing acres of marginal cropland are brought into production. Grain prices rise with the increased demand and

the increased costs on the marginal land. This allows the well situated landowner on the good land, that was purchased when the demand for land was less, to reap extra profit. In

addition, the laborer must be paid more if he is to afford bread to survive. Ricardo then concluded that the capitalist, whom he believed was responsible for the

progress of society, lost because he had to pay higher wages and the landowner gained due to increased grain prices, and

this would always be the case as long as the population

continued to increase.^®

Even though Malthus strongly believed in the problems of population increases, he still questioned Ricardo's

conclusions in regards to the landowners. Malthus worried

about a general glut due to a flood of commodities without

18 Ibid, 95-98.

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buyers.^® Ricardo thought that was logically impossible. A young Frenchman named Jean-Baptiste Say agreed with Ricardo's logic that a general glut was impossible adding

that the ability to purchase was guaranteed.Purchasing

ability is guaranteed because the costs accrued in production are income to someone else. A general glut could not occur since production also created income to buy the production. This premise that supply creates its own demand

became known as Say's Law. Malthus responded that savings might diminish the amount of income spent causing excess production. Ricardo thought that this notion was extremely foolish because the only reason a capitalist would save profits is to reinvest them into more labor and equipment to make even larger profits which would insure that a general glut would not occur.

The United States during the 1930's was experiencing a general glut according to Wilken and many other

observersPeople were going hungry and needed government

sponsored soup kitchens to survive. There were adequate supplies of food available but large numbers of people had very little or no income to purchase the food even though

agriculture prices were extremely low. Malthus was correct, a lack of income could cause a general glut. Wilken and his

^®Ibid, 100-101.

2°Ibid.

^^Walters, UNFORGIVEN, 270.

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followers argued that this lack of income came about due to

cheap imports following WWI which effectively reduced

agriculture prices and incomes in relation to other prices.

When that diminished income flowed through the economy the nation's income was also diminished and a general glut

occurred. Cheap food imports occurred because contrary to Ricardo's time, non-agriculture interests had gained the

advantage politically in America. Industrialists were becoming much larger and fewer, labor was in the process of organizing, but agriculture was still composed of many small independent units. Agriculture approached Adam Smith's ideal situation of perfect competition and consequently was open to exploitation by the other sectors of the economy that had established some power over the market. Adam Smith believed in natural economic laws that would

ultimately improve civilization through self interested behavior and perfect competition. Thomas Malthus believed in natural economic laws but said that population growth

forecast a pessimistic future for civilization. David

Ricardo, agreed with Smith and Malthus that economic laws

ruled production and distribution of goods, but added the

pessimistic notion that those laws maintained a system where

labor received just enough to survive and the capitalist's

profits were eventually reduced to zero while the landowners

became rich. The economics of Malthus and Ricardo painted a

gloomy picture which became even gloomier with environmental

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degradation and extremely poor working conditions that resulted from England's factory system in the 1800's. It

was generally believed that the economic laws that these

great economists had discovered were irrefutable and the masses were destined to a brutish existence. Hope was

revitalized by an economist named John Stuart Mill.

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Chapter 3 Society Determines Distribution

The development of economics was thoroughly surveyed in Mill's Principles of Political Economy. His insight was added to the text when he pointed out that economic law governs production but not distribution. Mills stated that, The things once there, mankind, individually or collectively, can do with them as they please. They can place them at the disposal of whomsoever they please, and on whatever terms.... Even what a person has produced by his individual toil, unaided by anyone, he cannot keep, unless by the permission of society. Not only can society take it from him, but individuals could and would take it from him, if society...did not...employ and pay people for the purpose of preventing him from being disturbed in (his) possession. The distribution of wealth, therefore, depends on the laws and customs of society. The rules by which it is determined are what the community make them, and are very different in different ages and countries, and might be still more different, if mankind so chose. . . .^^ Once stated, the common sense of this proposition was so compelling that the followers of laissez-faire economics were dealt a serious blow. Natural laws govern physical production from the earth but how that new wealth was

transformed and distributed depended upon man. Collectively

mankind could design an economic system that would benefit the masses rather than exploit them. Mills had provided the philosophical framework for governmental activism in the

economic arena that would eventually lead America out of the

22Heilbroner, THE WORLDLY PHILOSOPHERS, 129-130.

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Great Depression. Conservative economists as well as the

radical Karl Marx refined Mill's discovery by adding that separation between production and distribution is not always

so clear-cut. The distribution system that society designs

also can determine how natural production at the beginning

of the economic cycle is valued or priced. Followers of Carl Milken maintain that it is this compensation that flows through the system providing the income to purchase the production as it is transformed and traded, just as Say perceived. However, society can inflate this initial price as it did in Ricardo's time or society may restrict this price as it did in Milken's time. Milken was a contemporary of John Maynard Keynes and shared some similar views. In

his discussion on John Maynard Keynes, Robert Heilbroner states in The Morldlv Philosophers. Mhen most of us individually (and therefore all of us collectively) enjoy high incomes, the nation is well off; when our total individual (or national) income drops, we are in depression. But income— national income— is not a static concept. Indeed the central characteristic of an economy is the flow of incomes from hand to hand.

A depression occurs if this income is diminished because a substantial number of businesses decline to use savings to invest in new production, according to Keynes. Businessmen

that perceive the future outlook to be poor, for any number

of reasons, will postpone investment decisions, and a

downward spiral begins. As income contracts further.

23 Ibid, 266.

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savings contract as well and are eventually used to replace lost income. In 1929 the American public saved $3.7 billion

of its income; but by 1932 and 1933 Americans were saving

nothing and drawing down their previous savings. Investment was desperately needed but investment requires

available savings at low interest rates. The solution

according to Keynes was for government to increase government spending, even though that required government

deficits.Government spending need only be increased on a temporary basis to move the United States out of the depression, but the funding needed to be substantial. Roosevelt had increased government spending by 1934, two years before Keynes published his solution in The General Theory of Employment# Interest and Money, but it wasn't until America's entrance into WWII that these funds became substantial.

The physiocratic concept that a nation's income circulates through the economy through trade transactions is

in agreement with Keynes. New physiocrats such as Carl wilken believed that the income that individuals were

exchanging diminished when agriculture prices were reduced in relation to other prices. Keynes believed that the

income that individuals were exchanging diminished when

businesses failed to invest the nation's savings. Perhaps,

^^Ibid, 272.

"Ibid, 275-276

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these are two sides of the same coin. The physiocrats believe that a reduction in income at the beginning of the

cycle reduces the nation's income which reduces saving which

in turn reduces investment which then reduces income.

Keynes did not discuss the origination of the initial income

as the physiocrats had, but instead started with a reduction in savings, then proceeded just as the physiocrats did, with

reduced investment, reduced income, and further reduction in

savings. Perhaps, a balance between savings and investment to maintain national income is another way of looking at a

balance between different sectors of the economy to maintain national income. The key is that society must use its power to maintain a balance within the economic cycle and not allow diminished individual income to start a downward spiral.

The Great Depression of the 1930s provided staggering

evidence of the failure of the economic system to be self regulating for the benefit of society, as Adam Smith believed. If society determines the distribution system as Mill suggested then society had caused the problem and

society could correct it. Carl Wilken began a through

analysis of Economic Reports of the President of the United

States to determine how a nation with such vast resources

and an educated, industrious work force could find itself in

such dire straits. He determined that a proper balance

between the price for production from nature in relation to

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the other prices in the distribution system is necessary to

achieve the greatest benefit for the common man. The

determination of this reasonable price involves the producer as well as the consumer. Wilken found that approaching the determination of this price from the producers' viewpoint to be the most revealing.

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The producer needs to cover his production expenses plus a reasonable profit to compensate him for his managerial inputs and his risk taking. This provides

adequate income to meet reasonable living expenses for the farm family. If a fair price is symbolically designated as one dollar per unit, then the following sequence takes place. When the producer earns this dollar he puts it back into the economy by purchasing those items his family needs and desires. The dollar may go to a retailer who uses it to pay a wholesaler, who pays a manufacturer, who in turn must pay labor. Labor then completes the cycle by returning a portion of his earnings to the producer by purchasing food.

This example is greatly simplified but it illustrates two major principles, according to the physiocrats. The first principle is that there is indeed a beginning to the

economic cycle. The earth provides the original source of

wealth in the form of raw materials. Approximately seventy per cent of this new wealth comes from agriculture.^®

Either barter or compensation for this new wealth is

necessary for the economic cycle to begin. Without raw

materials there are no products to consume or trade and no

26Walters, UNFORGIVEN, 157

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resources for labor to transform into more useful products.

The price paid for these materials at this critical first

step becomes the income that circulates through the economy. As the original dollar is exchanged its effect is multiplied.

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The first premise of physiocracy is that nature provides the original wealth. The second premise deals with

the turn-over effect of the original dollar paid to the

producer of the raw materials according to Wilken and his

followers/ the new physiocrats. When Carl Wilken analyzed Economic Reports of the President of the United States he

determined that the ratio of total national earned income when compared to gross returns to producers of raw materials

is approximately 5 to 1 in the United States, based upon government data from 1910 to 1967. Thus, according to wilken, if the producer in the United States receives a fair price of one dollar then the economy has approximately five dollars to spend due to the turn-over affect. An

examination of what occurs when agriculture is exploited and a fair price is not paid to the producer helps tremendously

in determining the correct price.

The agriculture industry comes closer to meeting the requirements of perfect competition than any other industry in the United States. There are many agriculture producers

that individually have no control over the market and they are producing raw materials that are generally standardized,

which results in an industry of price takers. The

individual farmer has no effect on the market price

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regardless of whether he sells his entire crop or not, because his production is only a very small percentage of total production. When the agriculture industry produces an

adequate food supply, especially in corn and wheat which

dominate acreage in the United States, the price drops dramatically. This is due to the inelasticity of the demand

curve for food, or in other words, as long as an adequate supply is available then even significant decreases in price cause very little increased consumption. The new physiocrats believe that in the short run, individual farmers respond to the resulting low prices by attempting to produce even more product to come up with the same amount of

total dollars needed to pay their fixed costs, production expenses, and earn a living for their family. This added production puts even more pressure on prices. The downward

sloping supply curve that is implied by this short run

scenario is rectified in the long run when the lower prices finally force the individual farmer to reduce supply by going out of business.

The competitive nature of agriculture production and this built-in incentive to increase production in the short run when prices are low leaves the productive American

farmer at the mercy of the market. The United States

Department of Agriculture reveals the relative position of

agriculture in the market by comparing agriculture prices to

non-agriculture prices with a parity index. This parity

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percentage reflects the prices that farmers receive for their products as compared to prices they pay for goods that they purchase. The government's calculations show a parity

ratio very close to 50 percent in the 1990s.The followers of Wilken, which I shall call the new physiocrats,

view this with alarm since the relative strength of agriculture is diminished by 50 percent compared to the index base year. The base year currently used is an average

of the previous ten year period. The new physiocrats, also point out that at 50% parity, agriculture is not earning its symbolic dollar but instead is earning much closer to 50

cents. According to Wilken's turn-over affect, the result is an economy earning five times 50 cents or $2.50 rather than $5.00. This leaves a deficit in earning power of $2.50. The new physiocrats, however have not addressed the

possibility that increases in quantity produced per acre may generate enough additional revenue over and above the

increased production costs to alleviate some or all of the

price decrease. The problem is not as great as it first appears since non-agricultural enterprises are using similar

technology to achieve comparable gains in productivity

therefore causing little affect on the parity ratio. If the

new physiocrats are correct and today's farmer is underpaid, then according to Wilken there are only three options

27 USDA "Agricultural Prices" Report (April 30, 1993)

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available. Measures taken to adequately pay the farmer is

the favored option of the new physiocrats, failing this,

then according to Wilken, the nation must either reduce its

standard of living or go into debt If the option to reduce the standard of living towards

the $2.50 level is pursued then a recession is encountered when earning power drops below the five dollar level and a depression would develop as the $2.50 level is approached.

Since the depression of the 1930s, policy makers have been very reluctant to pursue this policy, especially beyond the recession stage. Wilken's remaining option is the substitution of debt to make up the loss in earned income due to low agriculture prices. This has been the favored option of the United States since the early 1950s. A general adaptation of Keynesian economics by a majority of

economists has been used to justify this debt injection. However, rather than using debt injection as a short term stimulus as envisioned by John Maynard Keynes, it has now become a long term necessity. Both private debt and public debt have increased until the combined debt exceeded 10 trillion dollars in 1988.^®

28Walters, UNFORGIVEN, 72.

^®Milton Jacobson, "Economic Profits", THE AMERICAN TRADE AND COMMERCE NEWSLETTER (Sept./Oct.1989).

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There are major consequences to running an economy

based upon debt injection rather than sufficient earning

power. The most obvious difference is that borrowed money

must eventually be paid back. To pay back the debt/

sufficient earning power must eventually be realized through

adequate pricing of agricultural products, according to

Wilken. In the meantime, ownership of land, natural resources, and the means of production become increasing controlled by fewer and fewer individuals as the debt grows larger. Individual producers become managers and laborers rather than land owners. As long as those who owe the debt

are relatively powerless to increase their earning power the

trend of debt injection and its consequences will continue. Another major difference between earning power and debt is

that interest continually accumulates on the debt. Over many years this has the effect of increasing the total debt

well beyond original intentions magnifying the problems associated with debt.

Economic policy makers must also face the difficult

problem of how much debt to inject if the producers of raw

materials are continued to be underpaid. If too little debt

is injected then we are back to the problem of recession and

even depression if the restriction is great enough. If too

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much debt is injected then we end up with too many dollars

chasing too few goods which results in inflation. The new physiocrats believe that fair prices to the

producers of raw materials is of the utmost importance, not only to the producers, but to the economy as a whole. Fair

producer prices insure that the monetary system functions

properly and the economy earns its way to prosperity through production. They point out that past economic history

reveals that the economy prospered when adequate prices were paid for raw materials. The two historical periods of 1910-14 and 1946—50 provided economic prosperity with fair

prices paid for raw materials. This was especially true for agricultural production which accounts for the lion's share of raw material production. Either one of these periods

could be used as a base period to determine proper production prices since both will produce the same results.Using the latest period of 1946-50 as the base

period, and then indexing raw material prices so that prices

for items the farmer has to sell increase as rapidly as

prices for those items which he must purchase, determines a

fair current price for those resources. This procedure is

the same as cost of living adjustments (COLAS) that millions of Americans depend upon to keep their wages, retirement

benefits, and social security payments from declining in

30Walters, UNFORGIVEN, 95-96.

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purchasing power. Although these COLAS are privately

negotiated/ increases in social security benefits along similar lines occur through the government. Given the importance of adequate pricing of raw

materials to the economy, it would be in the interest of the

United States to use a similar mechanism to determine a fair price for major agriculture products, such as wheat and feed

grains, and then develop a program to establish this price, according to the new physiocrats. Such a program was drafted and proposed by the new physiocrats when they came together in St. Louis on September 10-13, 1 9 8 6 . The

following groups comprised the steering committee for what was called the United Farmer and Rancher Congress: American Agriculture Movement Family Farm Organizing Resource Center Farmers Fair Credit Committee

Federation of Southern Cooperatives Iowa Farm Unity Coalition

National Catholic Rural Life Conference

National Council of Churches National Farmers Union National Grange

National Save the Family Farm Coalition North American Farm Alliance

^^United Farmer Rancher Congress, Delegate Approved Resolutions (St. Louis, 1986).

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Women Involved in Farm Economics The American Farm Bureau which is often recognized as

America's largest farm group was not a member of the

steering committee, although many of their members were in

attendance. The new physiocrats believe in Quesnay's major premise

that all new wealth is derived from nature but they have

expanded upon this premise by incorporating Wilken's trade-turn into their basic philosophy. Thus, they believe that a nation's earned income is determined by both the income generated from nature as well as the number of times

this income exchanges hands or turns over in the economy. Non-agricultural sectors such as manufacturing and distribution are not sterile but do contribute to a nation's income. However, the contribution that these sectors make

to national income is determined by the value placed upon Quesnay's net product and Wilken's trade-turn. Many factors such as technology, specialization, productivity of labor,

and the extent of transformation of the raw materials

determine the trade-turn and consequently the contribution of sectors not involved in raw material production. The new

physiocrats are in disagreement with laissez-faire policies

recommended by both Quesnay and Smith. They argue that

non-agricultural sectors of the economy have developed more

power within the market through industrial concentration and

labor unions, allowing agriculture to be exploited.

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Laissez-faire allows this situation to continue and the new physiocrats believe that steps must be taken to provide the proper balance by insuring that agriculture receive its fair share. An investigation into historical agriculture

programs helps provide the necessary information to examine proposed policies to achieve fair agriculture prices. Perhaps Socrates said it best when he stated,

"no man qualifies as a statesman who is entirely ignorant of the problems of wheat.

^^Dan Morgan, MERCHANTS OF GRAIN (New York: Penguin Books, 1980) 27.

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Chapter 7

U.S. Farm Policy: Depression to Post World War II

Economics is a very young discipline, where its more formal aspects date back less than 300 years. Economics that is involved in definitive agriculture policy is much

younger yet, with agriculture policy established since the depression of the 1930s being the most instructive. During the depression of the 1930s, Carl Wilken analyzed the

economy of the United States in an attempt to determine how a nation so rich in natural endowments and blessed with an educated and motivated workforce could end up in such dire circumstances. He found that the trade-turn for earned

national income in relationship to gross income from raw

materials was five to one for the 1910-14 time period and

remained at five up to and during the depression. Wilken

also determined that if earned national income is computed on the basis of farm income only, then the ratio is seven.

This makes sense since farm income accounts for

approximately seventy per cent of total raw material

production and consequently, a larger ratio results when

total income is compared to just farm income. This is easy to see mathematically as follows:

If GNP/GRM = 5/1 (where GRM = gross income from raw materials)

33Walters, UNFORGIVEN, 30.

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Then GNP/70% of GRM = 5/.7 = 7 = GNP/GAP (where GAP = gross income from agricultural products) Doing research with Economic Reports of the President of the

United States, Carl Wilken determined that from 1929-33,

gross farm income fell by $6.8 billion and that national income fell by $47.6 billion. Thus, seven dollars of national income was lost for every dollar decline in farm income. He further determined that from 1928 to 1953, the trade-turn for agriculture averaged 7.04.^^ However,

Wilken offered no proof that the one to five and one to seven relationships were causal relationships. These

relationships could be more completely examined with input- output analysis. The concept of input-output analysis has a long history, in fact, "the circular flow and general equilibrium concepts and the emphasis on interindustry relations may be traced back to Francois Quesnay's TABLEAU

ECONOMIQUE of 1758,...."The first empirical application of the input-output model in the Anglo-American

world dates from 1936 when Leontief published an input-

output system of the United States economy.

"Repercussions of changes in the level of expenditures on

total income can be estimated via the concept of the

^^Ibid, 30-31.

^^Harry W. Richardson, INPUT-OUTPUT AND REGIONAL ECONOMICS (New York: John Wiley and Sons, 1972) 7. ^®Ibid.

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multiplier."^’ However, aggregate multipliers such as the

original Keynesian income multiplier and economic base

multipliers fail to distinguish between the sectors in which

the initial expenditure changes originate. "Input-output models, on the other hand, enable us to derive sets of multipliers the main feature of which is that they are

disaggregated, recognizing that the total impact on income (output, employment) will vary according to which sector

experiences the initial expenditure change."^® Carl Wilken testified at many Congressional Hearings and gradually some members of the Senate and House became aware of the tremendous impact that his ideas could impart

if implemented. However, those forces that were benefiting from the accumulation of wealth into fewer hands were very

reluctant to use their power to share the wealth. Adequate pressure to change did not come from the people because the vast majority of the people were uneducated in the field of economics. It took an event whose impact was so great it

superseded all others to cause the entrenched power group to briefly share the wealth. That event was the entrance of

the United States into World War II.

Those that had studied raw material economics believed that to produce the necessary goods to win a war required

adequate prices for raw materials as well as adequate wages

3’lbid, 31.

^®Ibid.

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for labor. To do otherwise would result in a continuation of the depression and tremendous debts to pay for the war. The new physiocrats maintain that legislation that insured fair agricultural prices during and after World War II was

one of the major reasons for post WWII prosperity in the

United States. The debts that were incurred during first

the depression and then the war, were reduced from 122.5

percent of GNP in 1945 to 38.6 percent of GNP by 1970.^®

The United States also financed the Marshall Plan but still had enough earned income following the war to bring about

this tremendous debt reduction as a percent of GNP. What

brought prosperity according to the new physiocrats was a government mandate known as the Steagall Amendment which required that key agriculture commodities receive no less that 90% parity prices, ending two years after the President declared an end to hostilitiesThis legislation was acted on by Congressional banking committees rather than

agriculture committees because banking committee members

understood that the amendment would increase income for the entire nation. The path which lead to the adoption of the

Steagall Amendment was extremely difficult even with the impending crisis of war.

^®Amacher, PRINCIPLES OF MACROECONOMICS, 272 ^“Walters, UNFORGIVEN, 254.

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In 1938 the Agriculture Adjustment Act provided a loan

rate of not less than 52% of parity on all agriculture commodities except corn which was slightly higher/^ The Department of Agriculture almost invariably fixed the loan

rate at the minimum allowable. Many Senators and

Representatives requested a loan rate nearer the maximum of

75% of parity. Then on May 26, 1941 loan rates were set at 85% of parity by an Act of Congress. In 1942, during the opening months of the United States' involvement in World War II, farm bloc law makers were working for a 110% ceiling and a 90% floor for grain prices. However, public sentiment

and the national press were so opposed to a fair price for

agriculture that they labeled such statesmen as John H.

Bankhead of Alabama, Guy M. Gillette of Iowa, Elmer G . Thomas of Oklahoma, Richard B. Russell of Georgia, and Scott Lucas of Illinois as traitors to the war effort due to their support of parity legislation.

In July 1942, farm prices were only 54 percent above

the 1910-14 period, whereas the average factory wage was 397.1 percent above the 1910-14 level.Still the farmer

was represented as dreaming of great riches while men were dying in war, even though all he requested was a fair price.

The new physiocrats proclaimed that the public did not

"Ibid, 253.

"Ibid. "Ibid, 256.

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understand that fair farm prices were necessary for the

consumer's prosperity, as well as the farmer's, and that it was essential for a successful war effort. They believed

that it was a lack of fair farm prices that had caused the depression of the 1930s just prior to World War II. Farmers

were destroying crops and livestock during the depression because of rock bottom prices. At the same time Americans were going hungry because they did not have the income to purchase food. Low farm prices could not generate adequate

national income and the United States experienced hunger in the midst of plenty. Congressman Rankin of Mississippi stated that the Wagner Act and the Wages and Hour Act had raped the farmers because it provided the labor sector with minimum wages and time and a half for overtime while farmers continued to receive less than fair prices. The public understood the importance of labor having proper income, and

thus purchasing power in the economy, but they did not

understand that labor's income was dependent upon farm

prices. With the proper balance between agriculture prices and wages for labor, as the United States had in 1910-14 and

in 194 6-50, the nation prospers. Remove that balance by

attempting to pay other segments of the economy, such as

labor, more than the nation earned through raw material

production and the books didn't balance, according to

Wilken, with results like the depression. During the debate

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over the Steagall Amendment, Congressman Charles S. Dewey

argued that it was all quite simple, If farm prices advance over parity, the wage earners dollar will buy less, hence his real wages are lower. If, on the other hand wages increase too rapidly, parity gets 'out of kilter' as far as the farmer is concerned because manufactured articles increase in price to cover wage raises Another argument which helped to bring about passage of

the Steagall Amendment was the fear that the United States

might lose its farm production when it was desperately needed for the war. Congressman H. Carl Anderson reinforced this fear by revealing that one weeks' issue of a newspaper

in his district had 42 farm auction advertisements. Even if the lawmakers did not understand the economic impact of parity, they did understand that food and fiber production

might lag without adequate prices.

President Roosevelt also contributed to the debate, but his messages were not always the most consistent. However, two quotes from the President did have an impact on final passage of the legislation. President Roosevelt stated that.

The farmer, instead of looking forward to a new collapse in farm prices at the end of the war, should be able to look forward with assurance to receiving a fair minimum price for one or two years after the war. Such a national policy could be established by legislation.^^

""Ibid, 259.

""Ibid, 260.

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President Roosevelt also understood what a fair price

entailed because he said, After all, parity is, by its very definition, a fair relationship between the prices of things farmers sell and the things they buy. Calculations of parity must include all the costs of production including the cost of labor. Despite Roosevelt^s quotations favoring parity he still threatened a veto, but the measure passed with only three

dissenters in the Senate and 13 in the House, leaving no chance for a veto. The legislation required the Secretary

of Agriculture to make loans at 90% parity through the Commodity Credit Corporation for a period of two years after the first of January "following the time when the President proclaims an end to hostilities." Prices at 90% parity on storable commodities at harvest time generally rose to 100% of parity through the market system later on in the year. Farm bloc law makers had wanted permanent parity but had won only a temporary victory that would end shortly after the

war - On May 18, 1947, Representative Charles B. Hoeven of

Iowa introduced legislation for permanent parity. This legislation called for 90% of parity loans on the seven basic farm crops at that time, cotton, flax seed, wheat,

rye, corn, oats and barley, with July 1, 1925 to July 30, 1929 as the base period. It also provided for a 35%

permanent reserve to protect the livestock industry against

^®Ibid.

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liquidation because of drought periods, and imposed a

flexible tariff at parity on all farm productsThus, the tariff would be zero when the world price equaled the

domestic parity price level. Exportable surpluses would be sold at world price levels; the difference between the parity price and world prices being assessed against the duties collected on imports of needed farm products.^® according to Wilken. Supporters of this legislation argued

that it would not weaken free enterprise but would strengthen it. They said that competition can be unethical and so severe that it destroys national income, reducing consumption. For instance, if farmers produce an adequate

supply of grain and that grain is, to a large extent, available at harvest, then competition from sellers results in prices that are much too low. The legislation that

Representative Hoeven introduced, with the support of all the Iowa representatives, was to act as a governor to control the excesses of our free enterprise system.

By June, House Agriculture Committee Chairman Hope

stated that he wished to report out a bill that continued

90% price supports through loans, purchases and methods

other than direct payments to farmers. The house approved the direction with only three representatives dissenting.''®

"^Ibid, 299.

"Ibid. "Ibid, 328.

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The Senate approved the Aiken Bill with its provision for 60

to 90 per cent of parity for agriculture. The bill also used a 10 year moving average to provide the base year,

which at less than full parity would have the effect of continually lowering base year prices. If passed the Aiken

bill would go into effect 18 months later on January 1,

1950. The conference committee that was appointed to work out a compromise between the House and Senate bills met three times in three days with no progress. Then Representative Reid F. Murray of Wisconsin resigned as a

conferee and George W, Gillie was appointed. After the new appointment the conference committee met for a fourth time and the House Democratic members remained faithful to the House version but the Republican members went over to the Aiken Bill. Proponents of the Aiken Bill argued that since the bill would not take effect immediately, farmers would have parity for one more year and there would be plenty of time to amend it to bring it up to full parity later. In

June of 1948, the conferees accepted the Aiken Bill from the

Senate and the conference report was accepted by the House 147 to 70.5° The legislation, which was referred to as

either the Aiken Bill or "sliding scale" because it would

effectively start sliding parity from 90 percent to 60

percent, was signed by President Truman.

50 Ibid, 330.

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In the fall of 1948, Harry S. Truman carried his

"give^em hell" campaign into the countryside and in campaign speeches rejected anything less than full parity. On April

7, 194 9 Secretary of Agriculture Charles E. Brannan appeared

before a joint meeting of the Senate and House Agriculture

Committees to tell lawmakers how the Truman promise could be kept through what came to be known as the Brannan Plan.

Brannan proposed a support system based on direct subsidy payments in place of price supports on perishable

commodities. Thus, the government would attempt to pay in

cash what the market price failed to provide. Without tariffs the Brannan Plan would allow U.S. prices to move to

world levels. However, world prices were too low to provide the necessary national income and purchasing power needed for U.S. solvency and prosperity, according to Wilken. To

attempt to use taxpayers money to make up the difference was like robbing Peter to pay Paul and the results were likely to be quite inadequate and very inefficient. The plan

promised cheap food to the consumer and prosperity to the

farmer, but when additional taxes to the consumer and bureaucratic distribution of subsidies to the farmer are considered it would achieve neither. The money used by the

consumer to pay the additional taxes could have been used

for other consumer items and thus the national income that

is generated by the Brannan Plan, even if the subsidies to

51 Ibid, 333-334

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the farmer fully make up the difference in price, is less than if a proper farm price is paid to begin with.

Physiocrats believe that net income cannot be increased with low food prices because income diminishes when farm prices

decline. The debate had moved from arguments on full parity versus less than full parity to a choice between the existing Aiken Bill due to take effect the following year

and the Brannan Plan, neither of which offered fair farm

prices.

By 1949 Congress was still having difficulty deciding whether to repeal or postpone the Aiken measure and replace

it with the Brannan Plan. Finally, Democratic Senator Russell of Georgia and Republican Senator Milton Young of North Dakota used their influence to restore 90% price supports for one more year. With the arrival of the Korean

War in 1950, this became the modus operandi and the full Aiken formula was not put into effect until 1954.

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Post World War I versus Post World War II

Both World War I and II provided the impetus for higher

farm prices that provided sufficient national income for the economy to prosper. However, entirely different approaches with regards to farm policy were taken after each war with

dramatically different results. During World War I, the Allies, namely England, France, Holland, and Italy, borrowed large sums of money to finance their efforts, with $15

billion being borrowed from the international bankers, especially J.P. Morgan and Company of America and the

Rothschilds of England, and another $15 billion from the United States government. By 1919, with the completion of the war, the popular cry in the United States was that

"Europe pay US what she owes US." The American taxpayer did

not realize that the US that was to be repaid was the international bankers. Europe had destroyed its factories

and consequently the only means they had of raising the

money was through the production and sale of agricultural

goods. Tariffs were lowered in the United States to provide

a market for European agricultural goods even though we were

supplying a sufficient amount with domestic production.

From 1919 to 1929, we imported a total of more than $43

52 Ibid, 2

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billion in European goods.This effectively destroyed

our agriculture sector and the national income that relied

upon it. The United States government began to call the

American farmers' crops that had been replaced with European imports a surplus. After studying the economic situation that the United States had allowed to develop President

Coolidge informed the American public "I choose not to run." President Hoover took office in March 1929 and passed an executive order declaring a moratorium on the collection of

war debts, since the international bankers had been paid back and the method used to repay them was harming the country much more than helping it. However, England, France, Holland and Italy had approximately $3.5 billion in credits, from their exports, in U.S. banks.When the $3.5 billion was withdrawn from the banks, the banks were

unable to collect that large a sum from their borrowers quickly and consequently, they were forced to sell stocks and bonds that they owned. This helped to precipitate the

great stock market crash in October 192 9.^^

In May 1917, one month after the American declaration

of war on Germany, United States wheat was selling for $3.17

per bushel. In 1920 the United States removed price

"Ibid, 3. ^“Ibid, 4.

^^Tom Linder, Georgia Commissioner of Agriculture, in testimony before the House Ways and Means Committee, 1947.

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controls on wheat and prices plunged.^® By 1921 Nebraska farmers were burning corn for fuel and the prosperity of the

previous decade faded into memory. Hope of price recovery evaporated when the bottom dropped out of the wheat market in October 1929. It became known as Black Thursday on the

Produce Exchange. Wheat futures lost a tenth of their valve

in two hours and kept dropping.The crash destroyed the income base for farmers and the nation.

Instability - the very thing that had made the unregulated world commodity markets so appealing to speculators and merchants all through the 1920s - had ravaged the agriculture upon which so much of the North American and European economics depended, said investigative reporter Daniel Morgan.^® The new physiocrats believed that the collapse in prices for raw materials worldwide precipitated a dramatic decline in incomes which in turn caused a decline in trade. Worldwide imports dropped over 10 percent before passage of the Smoot-Hawley Tariff Act in 1930.^® By the end of 1932, worldwide imports had declined by over 50 per cent. Economists continue to blame the Smoot-Hawley Act for much of the depression of the 30s, however, the act was a

response to low incomes brought about by low prices for raw

®®Morgan, MERCHANTS OF GRAIN 4-5.

^"Ibid, 116.

^®lbid. =®Walters, UNFORGIVEN, 238-239.

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materials, especially agricultural products. As prices and

incomes continued to decline, imports also declined with the Smoot-Hawley Act receiving much of the blame. When incomes declined in the United States many Americans were unable to purchase their usual food stocks. This lack of income

caused agricultural supplies to increase while people were

going hungry. Smoot and Hawley simply reacted to this

increased supply by introducing legislation to limit

imports. By 1932 wheat had fallen to 50 cents a bushel in Kansas

City.®° Presidents Harding and Coolidge believed in laissez-faire economics and consequently, the government did

nothing to provide stability and support for national income with fair farm prices. After World War I, there was no

attempt to continue to support national income with adequate farm prices. The new physiocrats believe that the depression that resulted was not natural or inevitable, it was man-made and could have been avoided.

There had never been a better example of the feudalistic structure of the grain trade than the 1930s, when the contrasts between the poverty of those upon whom the whole system depended- the farmers - and the prosperity of the shippers and processors were probably the greatest in history.

according to Morgan. 61

^“Morgan, MERCHANTS OF GRAIN, 117. “ Ibid, 131.

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In contrast/ the United States followed a completely different course after World War II with passage of the Steagall Amendment that supported farm prices into the early

1950s. There was no depression, in fact, great prosperity

was experienced. Consumer demand that was not fulfilled

during both wars provided increased spending immediately

after the wars but that prosperity lasted much longer after WWII because of the Steagall Amendment, according to the new physiocrats. However, in the 1950s, the Aiken Bill was still on the books and ready to take effect reducing farm

prices and national income. The effects of trade in farm

products at world prices and the substitution of debt for earned income were soon to play prominent roles.

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Recent Farm Policy: Decline of Parity Concept

An event which occurred in 194 9 was to have significant

future impact. England had kept the pound sterling at $4.05

through the 1930s and through World War II even though the Roosevelt Administration raised the price of gold to $35 an ounce from the previous $20.67 an ounce.When England

devalued the British pound by 30% to $2.80 in 1949, the price of goods being produced in England also dropped 30% to the rest of the world. As a result of the devaluation, the

United States became the high market in the world. In the five years following the devaluation of the British pound according to Wilken's computation, the United States imported $6 billion more in farm products than were exported. The American economy had imported its surplus. Thus, agricultural raw materials were perceived to be in

surplus as Dwight Eisenhower considered running for the

Presidency.

In 1948 federal, state and local budgets enjoyed about

an $8 billion dollar surplus, but the country was still

using about a $16 billion dollar debt to expand the

economy. The United States was still reconverting from a

war economy and reopening a lot of business units that had

®^Walters, UNFORGIVEN, 341. “ Ibid, 361.

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been closed because of rationing. The Korean War began in

1950 and debt expansion increased from $18 to $40 billion a

year.®^ Pressure on farm prices^ which was aided greatly

by the increase in farm product imports that had been

occurring since 1949, did not allow the legislative efforts

of Senators Russell and Young to maintain parity to be effective. This resulted in the same type of situation that

had lead the United States into the depression of the 1930s. However, the country had experimented with debt injection, as recommended by John Maynard Keynes, during WWII under

President Franklin Roosevelt. Consequently, when farm prices were pressured down, the response was to increase debt to make up for the lost income according to the new physiocrats. When the Korean War ended, debt expansion dropped from $46 billion in 1953 to $30 billion in 1954 without any corresponding increase in farm prices to maintain national

purchasing power and the United States experienced the 1954 recession. Rather than raise farm prices the United

States injected $72 billion dollars of debt into the economy in 1955 and a new era of debt creation had begun.®®

Eisenhower's Secretary of Agriculture, Ezra Taft Benson, and

his Assistant Secretary, Earl Butz, were in charge and a

®"lbid.

"Ibid, 400. ®®Ibid, 362.

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agricultural prices.

Between 1950 and 1960 the United States doubled its private and public debt. Financial advisors were not concerned with what the new physiocrats perceived was the root cause of the problem, namely, inadequate income due to

low farm prices, but instead occupied their time dealing

with the amount of debt that needed to be injected. In 1957

the Fed used tight credit to cool the economy and unemployment went from 4 to 7 percent.®^ This result shocked the Eisenhower administration which hastily unveiled a program to build $2 billion worth of post offices and the Fed allowed credit to again flow more freely. In 1961 full parity would have given the United States a national income of $486 billion but low farm prices resulted in a national income of only $430 billion.The United States needed

$56 billion more income to pay payroll and capital costs. Wilken maintained that unearned income through debt

expansion was again substituted for earned income from fair farm prices by raising mortgage debt by approximately $55

billion. Still most agriculture experts believed that farm

prices should be the same as world prices which were

approximately 60 percent of parity.

^■'Ibid, 392. ®®Ibid, 394.

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President Kennedy's Agriculture Secretary, Orville

Freeman, believed lower prices for wheat and feed grains

would induce deficit production so "surplus" holdings could

be sold. He also believed that thousands of small and "inefficient" farms should be eliminated with rural manpower moving into factory jobs. In addition 34 million acres of

cropland were to be converted into parks, forests, grasslands, and wildlife refuges by 1969 and 68 million by 1985. The Kennedy administration drafted an emergency measure in 1962 that involved both price supports and export subsidies on feed grains (corn, barley, sorghum and oats). Farmers were guaranteed a minimum $1.20 a bushel for their

corn if they agreed to plant 20-50 per cent fewer acres of the crop than they usually did.®® Most farmers and economists considered the program, which reduced government costs and governmental stocks of grain, a success, but Cargill officials felt it was a disaster. They maintained that the price support of $1.20 a bushel priced Americans out of world markets.

No one was concerned that U.S. grain prices were

approximately 60% of parity and therefore too low to produce adequate income according to the new physiocrats. In early

1962, Cargill's William Pearce, a lawyer who headed the

firm's public affairs department and Melvin Middents, their

®®Morgan, MERCHANTS OF GRAIN, 14 9. ^°Ibid.

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wheat trader drafted the Middents Plan."'^ The plan called

for price supports to be reduced to world levels and an end

to corn export subsidies. Farmers were to receive a government check to make up for the lower prices. The plan

received serious consideration but was not adopted.

As well as pursuing a policy of ever lower grain prices

in the 1950s and 60s, the government was also actively engaged in efforts to increase international markets for these p r o d u c t s I n the 1950s tremendous efforts were made to get people around the globe to eat like Americans did. Millions of rice-eaters were converted to wheat bread. President Chiang Kai-shek's government in Taiwan advertised that "wheat eating is patriotic." Biscuits made from soft

white wheat produced in the Pacific Northwest were promoted in Korea. Bread was fed to school children in Japan. Pressure was exerted by the United States government to reduce transportation costs for U.S. wheat to make it

competitive with Canadian wheat in the Japanese market.

Pressure was also applied to Japan, with good results,to

reduce its trade surplus with the United States by buying

American wheat.Prior to this the United States and

Canada, which together dominate international trade in

wheat, had cooperated in international pricing. The

^^Ibid.

^^Ibid, 145.

^^Ibid.

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atmosphere became much more competitive during Kennedy's administration and prices moved lower. In 1962, in the town of Novocherkassk, Soviet school

children, housewives, workers and shopkeepers demonstrated

against increases in the price of meat and butter. Slogans

used in the demonstration included "Down with Khrushchev!"

and "Use Krushchev for Sausage Meat!" Seventy to eighty

people died when soldiers fired into a crowd and the families of the killed and wounded were deported to Siberia.Aleksandr I. Solzhenetsyn wrote in The Gulag

Archipelago, that "without exaggeration, this was a turning point in the modern history of Russia.It was evident that there were political dangers involved if food imports were inadequate. The Soviet Union began to import grain in 1963, first from Canada and then later from the United States. There was a great deal of opposition to selling grain to the Russians, including opposition by Richard Nixon, but on October 9, 1963 Kennedy authorized that four

million tons of wheat and flour be sold to Russia.Other

countries were encouraged to increase beef, hog and poultry which were fed with corn and soybeans from the United States. Frozen broilers were shipped to Germany until the

Europeans put up high tariffs to protect their new broiler

^^Ibid, 156.

^^Ibid.

^®Ibid, 152.

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industry, then the United States sold them corn and soybeans to feed their broiler industry.

Public Law 480 was passed by Congress in 1954 and has

since become a permanent fixture of both farm and foreign policy. There was much opposition from conservatives and

southern Democrats but proponents such as Senator Hubert

Humphrey and Secretary of State John Foster Dulles assured passage of the legislation. P.L. 480 uses excess American

food stocks to provide food aid to foreign countries in

need. The program assists American farmers and grain trading companies as well as supplying the government with a

foreign policy tool. The actual mechanics of P.L. 480 work

as follows : Foreign governments receive authorization from the United States government to purchase, with American loans, certain quantities of American farm commodities. The foreigners handle the actual transactions, contracting with

private exporters to obtain the goods. Payments for these goods come from the United States Treasury in the form of

loans, the money is then forwarded to commercial banks in

the U.S., and then to private exporters when the ship is loaded. These payments are loans that the foreign country

is obligated to pay back, but the terms provide grace

periods and long maturities, and in some cases the United

States eventually just forgave the loan.^^ An average of

20 percent of U.S. wheat exports were financed with P.L. 480

77 Ibid, 147-148.

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intensive export promotion and P.L. 480 the United States

was still not alleviating the perceived "surplus" problem and farmers were worse off than before.

The Committee for Economic Development (CED) that represented the views of some 200 business leaders revealed their perspective in a report entitled "An Adaptive Program

for Agriculture". The report listed the problems of agriculture as they saw them: rapidly rising productivity; diminishing use of labor rather than capital; inelastic

demand; lack of response to price changes; and unsuitable flow of human resources out of agriculture.’^ Carl Wilken appeared before the House Committee of Agriculture to refute the CED report on grounds that it constituted economic charlatanism. Using his balance sheet approach, he sought to show that elimination of farmers in order to turn them into factory hands did nothing to repair the income equation, that is, the inevitable requirement that private enterprise earn enough to pay the wage and capital cost bill. Indeed, were all the farms to be liquidated and turned into corporation entities, the parity requirement would still have to be met simply because the wage bill and the capital cost bill would have to be met.®°

Business leaders believed that if farm prices and

consequently the price of food was reduced that consumers

would have more money to buy manufactured goods. They did

not understand or believe Wilken's hypothesis that the

’®Ibid.

’^Walters, UNFORGIVEN, 398. ®°Ibid, 399.

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economic cycle started with the harvest of raw materials, 70 percent of which came from agriculture, and that a fair farm

price was needed for the trade-turn to provide enough

national income. If the price did not keep pace with what the farmer had to buy from other sectors of the economy then there would be insufficient national income. The CED report was falling back on an old argument dating back to mercantilism which assumed that if you wanted

a bigger piece of the economic pie, then someone else had to receive a smaller piece of the pie. Not only were certain sectors of the economy within a nation exploited but colonies were established to be exploited as well. The European countries did not realize that cheap raw materials acquired from their colonies established a correspondingly cheap market for their own manufactured products. Fair prices for raw materials would have benefitted the colonies tremendously and the European countries would have also received increased income. The new physiocrats believe that

post WWII economic history has demonstrated that the size of

the economic pie can be increased. The key to increasing

the economic pie, which in this case represents national

income, requires the proper balance between prices for raw

material production, and goods and services that the farmer

purchases. They believe that periods of price supports for

agricultural goods, that were not undermined by cheap

foreign imports, were the major reason that the United

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population enjoyed approximately 50 percent of the world's

income

The CED report was concerned about a surplus of both production and farmers. However, what was referred to as a

surplus in agriculture would generally be referred to as an inventory in other industries. For instance, in 1961 the manufacturing, wholesale and retail trade had an inventory

of $96 billion which no one perceived as a problem. At the same time agriculture had an inventory of $8 billion which was immediately perceived as a tremendous problem by businessmen making up the C E D Agriculture's inventory was easily misrepresented as a surplus for several reasons. Agriculture products have inelastic demand as the CED report indicated. Therefore, when production exceeds normal demand by even small amounts, large reductions in price occur. Conversely, if production is below normal demand, assuming no carryover in inventory, large price increases occur. It

is prudent and beneficial for a nation to carry enough

inventory to meet trade and population needs in those years

when production is reduced due to adverse conditions.

However, this reserve inventory is easily perceived as a

burden due to inelastic demand and tremendous downward

pressure is put on prices for the entire crop. The problem

®^Ibid, 400. ®^Ibid, 401.

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least a 365 day supply available for only day to day demand. The weak financial position of many farmers and the overall perception of surpluses with potentially lower prices prohibits them from holding grain and spreading sales out evenly during the entire year, creating even more downward

pressure. Even if the United States produced only enough grain for its domestic and trading needs, it only takes importation of a small quantity of product at lower world

prices to break the price structure of American producers. This was not uncommon and the effects are easily strong

enough to negate government price supports as it did from 1950-1954. Rather than labeling agriculture inventories as

surpluses and promoting a program to eliminate farmers and

reduce national income, advocates of parity declare that it would be far more helpful to recognize the benefits of a reserve and devise mechanisms to manage inventories without tremendous price swings in either direction. A reserve

should not be allowed to depress farm prices and national

income to the point where debt injection must be used to

make up the difference. In 1964, Walter Bowers, former assistant to the Under-Secretary of Treasury and former Chief Fiscal Officer

in the War Department released a study that compared returns

to capital for various segments of the economy. The net

return on capital investment was 0.5 percent for farmers, 4

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 62 percent for railroads/ 4 percent for utilities/ 8 percent for manufacturing and 8 percent for distribution. Low farm

prices resulted in very weak returns on investment for

farmers which had tremendous impacts well beyond the farmer.

In an address to the Agriculture Committee of the Independent Bankers Association in February 1965/ Wilken stated ... the loss of national income that had resulted from low returns to the farmer had been made up with increased debt expansion. The gross public and private debt for the nation stood at near $566.4 billion in 1950. By 1960 that figure had doubled to near $1 trillion. By 1970 it had doubled again to near $2 trillion.®^

Total private and public debt was approximately $10 trillion

dollars by 1988.®^ Agriculture policy since the Eisenhower era has abandoned the idea of fair prices for farmers in relation to other segments of the economy. The only governmental

activity that remains in this area is the parity index that

is still computed based upon a 10 year moving average. The

focus in agriculture policy had shifted dramatically to what

is perceived as the United States' perennial problem of surplus grain and the possibility of alleviating that

surplus through various mechanisms/ especially world trade.

Policy advisors believe that enhancement of exports requires

low prices so that the United States can maintain or

®®Ibid, 440.

Jacobson/ AMERICAN TRADE AND COMMERCE NEWSLETTER.

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increase its share of the market. Before World War II,

international trade in grain seldom exceeded 30 million tons

a year, but by 1975 trade had grown dramatically to 160

million tons.®^ Many countries that had once fed

themselves began to depend on the United states for a

substantial part of their food supply. Russia and India which formerly exported large quantities of grain to England became net importers. The United States became the superpower in grain exports. No country came close to the United States in corn production and Kansas and South Dakota produced more wheat than all of Australia.

85Morgan, MERCHANTS OF GRAIN, 34

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Chapter 10

Farm Policy Today: Export Emphasis

The importance of food was dramatically emphasized in the bloody rioting that took place in Poland when the

government attempted to raise food prices before Christmas in 1970. The price increases were withdrawn when

dockworkers burned the party headquarters in Gdansk and the shipyards were seized in Szczecin. The food riots in Poland

encouraged the Soviet Union to cover its grain deficit with

imports and to continue increasing the size of Soviet cattle herds. This process was aided when President Nixon, in June of 1971, removed the requirement that exporters obtain licenses for grain transactions. The requirement that a minimum of 50 percent of the grain be shipped on American

vessels was also eliminated. The stage was set and in 1972

the Soviet Union began buying large quantities of grain from the United States. World production was down that year and

the magnitude of the Soviet purchases caused prices to rise dramatically. Since most of the price increase came after the Soviet purchases, the event became known as "the great

grain robbery" of 1972.

For twenty years prior to 1972 the American farmer had

experienced low grain prices due to an inelastic demand

curve where even small increases in inventory resulted in

drastically lower prices. The Soviet grain deal now reduced

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inventory to critical levels and the inelasticity of the demand curve began to work in favor of the American farmer.

Grain prices equaled the parity levels that previously had occurred in 1910-14 and 1946-50. The American public

immediately became concerned with rising food prices. However, the new physiocrats pointed out that these parity farm prices would allow the rest of the economy to

dramatically increase national income without increased debt expansion. The American government and the American public

did not understand this concept and debt injection continued, opening the door to greater inflation than had

been experienced with previous debt injections, hurting both the consumer and the producer.

By 1975 grain prices had declined significantly and were continuing to decline. President Ford had vetoed higher price supports, but by July 24, 1975 the SovietUnion had bought 12.8 million tons of North American grain which was more than their first purchases in the "great grain

robbery" of 1972. As prices began to rise the reaction from

government and consumers was predictable. Chairman Arthur

Burns of the Federal Reserve Board at a hearing before the

Joint Economic Committee on July 29 said that the grain selling "frightens me." Two days later in Chicago, President George Meany of the AFL-CIO charged that the grain

sales were a product of "a calamitous, one-way detente."

The International Longshoremen's Association, with Meany's

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approval, announced its intention to boycott the loading of

grain bound for Russia. Prices did not reach parity levels. In June 1975, U.S. agricultural policy introduced target

prices, loan rates and deficiency payments, which we continue to use today. Each year before spring planting the

United States Department of Agriculture (USDA) announces

adjustments that will be made in target price levels, loan price levels and required set-a-sides. A farmer wishing to

participate must set-a-side the required percentage of his base acres, which must remain idle, earning no income for the farmer. Base acres are determined by the acres the farm

has historically planted to that particular crop. He is then eligible to receive a loan on his production from the government at the specified loan rate, for a period of nine months. At the end of the nine months he may either sell

the grain and pay the loan plus interest or he may forfeit the grain, which he has used as collateral, to the government. The government must by law keep this acquired

grain off the market until it reaches a specified release

price.

The loan rate acts as a price support, but the loan

rate is generally set below USDA cost of production

estimates, especially in recent years. Therefore,

additional income support is needed to keep America's

farmers solvent. Consequently, the program allows farmers

to receive deficiency payments equal to the difference

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between the target price and either the market price or the

loan rate, depending on which is higher, multiplied times the established yield determined by USDA. Table 1 and Table 2 show farm parity percentages, average market prices, loan

rates per bushel, the target rate per bushel, USDA^s

production costs per bushel, government payments per bushel

and the percent of required acreage reduction for wheat and

corn from 1975 to 1993. The tables were compiled from Agricultural Stabilization and Conservation Commodity Fact

Sheets.

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WHEAT (Table 1)

Year % Market Loan Target Prod. Govt. % Acre Parity Price Rate Rate Costs Pymts. Reduct

1975 79 3.56 1.37 2.05 2.98 0 0 1976 73 2.73 2.25 2.29 2.91 0 0 1977 68 2.33 2.25 2.90 2.77 0.65 0 1978 64 2.97 2.35 3.40 3.42 0.52 20.0 1979 60 3.80 2.50 3.40 3.50 0 20.0 1980 58 3.99 3.00 3.63 4.09 0 0 1981 59 3.69 3.20 3.81 4.22 0.15 0 1982 56 3.45 3.55 4.05 4.05 0.50 15.0 1983 52 3.51 3.65 4.30 3.82 0.65 20.0 1984 54 3.39 3.30 4.38 4.00 1.00 30.0 1985 52 3.08 3.30 4.38 3.99 1.08 30.0

1986 53 2.42 2.40 4.38 3.90 1.98 25.0 1987 53 2.57 2.28 4.38 3,59 1.81 27.5 1988 53 2.21 2.21 4.23 4.57 0.69 27 .5 1989 53 3.72 2.05 4.10 0.32 10.0 1990 53 2.61 1.95 4.00 1.28 5.0 1991 3.00 2.04 4.00 1.35 7.5 1992 3.19 2 .21 4.00 0.81 5.0 1993 2.97 2.45 4.00 1.03 0 1 Sheets,

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CORN (Table 2)

Year % Market Loan Target Prod. G o v t . % Acre Parity Price Rate Rate Costs Pymts. Reduct

1975 79 2.54 1.10 1.38 2.13 0 0 1976 73 2.15 1.50 1.57 2.05 0 0 1977 68 2.02 2.00 2.00 2.06 0 0 1978 64 2.25 2.00 2.10 1.99 0.03 10.0

1979 60 2.48 2.10 2.20 2.17 0 10.0 1980 58 3.12 2.25 2.35 2.91 0 0 1981 59 2.47 2.40 2.40 2.55 0 0 1982 56 2.55 2.55 2.70 2.38 0.15 10.0 1983 52 3.21 2.65 2.86 3.28 0 20.0 1984 54 2.63 2.55 3.03 2.74 0.43 10.0 1985 52 2.23 2.55 3.03 2.36 0.48 10.0

1986 53 1.50 1.92 3.03 2.05 1.11 20.0 1987 53 1.94 1.82 3.03 2.06 1.09 20 .0 1988 53 2.54 1.77 2.93 3.16 0.36 20.0 1989 53 2.36 1.65 2.84 2.48 0.58 10.0 1990 53 2.30 1.57 2.75 2.49 1.04 10.0 1991 2 .15 1.62 2.75 0 .41 7.5 1992 2 .34 1.72 2.75 0.73 5.0 1993 2.35 1.72 2.75 0.72 10.0

Sheets.

Target prices are used to calculate deficiency payments which are needed to provide sufficient income to farmers

when the market fails to do so. However, some problems

interfere with achievement of this goal. The largest

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problem is that target prices are set too low to provide adequate compensation to the farmer compared to other sectors of the economy where the farmer purchases labor and other necessary inputs. Also assigned county yields are often lower than actual yields which further reduces income

when deficiency payments are paid. Farmers do not like

receiving deficiency payments from the government but low

loan rates and adequate supplies guarantee low market prices

and consequently the deficiency payment is necessary for

survival. Farmers would rather receive their income from the market than from the government, but to do so requires an orderly marketing program. Farmers have been unable to

organize themselves to provide supply management on their own and thus a USDA administered supply management program

is needed. However, there is a major problem encountered by the government when designing a supply management program. For instance, the United States has restricted its

set-a-side requirements to insure adequate supplies are available, both domestically and for export, even if less

than ideal growing conditions prevail. Since grain has an

inelastic demand curve, a little extra grain production to insure adequate amounts reduces the price dramatically, as well as total revenue. Any attempt to maintain a reserve to

cover those years with unfavorable growing conditions

results in much lower market prices unless the reserve is insulated from the market.

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Another problem concerns our share of the international

export market. From 1977 to 1985, the U.S. share of the world's net wheat exports declined from 41.9 percent to 28.8 percent, while the European Common Market (EC) share rose

from -1.6 percent to 15.1 percent.®® The EC had negative

exports for 1977 because up through 1977 the EC was

importing wheat. The EC philosophy is to support agriculture prices for goods sold within the Common Market but any surplus produced beyond the needs of the Common Market are sold at very low prices on the world market.

This procedure is referred to as "dumping" and is a major

point of contention between the United States and Europe in

General Agreement on Tariffs and Trade (GATT) negotiations.

The U.S. wheat export price generally exceeded the EC export price between 1978 and 1985 which resulted in the change in export market shares.®^ The decline in export shares was a major factor for

changes in farm policy that were written into the 1985 farm

bill. To be more competitive in world markets, loan rates

no longer were allowed to trend upward but instead were

forced downward. Market prices moved downward when loan rates that provided a price floor moved downward. Target prices remained fixed at $4.38 per bushel from 1985 to 1988

®®Cletus C. Coughlin, "The Dubious Success of Export Subsidies for Wheat" Federal Bank of St. Louis (Nov/Dec 1988) 39.

®"lbid.

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and then were moved downward to $4.10 in 1989.®® Consequently, deficiency payments escalated rapidly and agriculture program payments reached record levels under the Reagan Administration.

To further improve the United States market share in the export market, the Export Enhancement Program (EEP) was also enacted in 1985. The EEP allows the USDA to give

government commodities to private exporters at no cost. This allows these exporters to sell U.S. commodities on the world market at prices below U.S. market prices and thus compete with the EC. EEP was designed to target those

countries where entities like the EC were dumping and therefore hurting U.S. markets. Our EEP program really was a response to the EC's export program, which is part of their Common Agricultural Policy (CAP), that was put into

place in 1962. The policy first became effective in 1978 when the EC began exporting grain rather than importing it.

The agriculture policy that the United States has today

is a continuation of the legislation that was passed in 1985 with a few modifications. One modification introduced in

the 1990 Farm Bill was a concept called "triple base", which

expanded the categories of acreage for wheat and feed grains, for program participants, from two to three.®® In

®®ASCS Commodity Fact Sheet, Wheat and Feed Grains, United States Department of Agriculture (1992).

®®Congressional Research Service Issue Brief, Library of Congress, "Agriculture and the Budget" (Nov.3,1992) 6.

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addition to (1) those acres fully eligible for loans and deficiency payments and (2) those acres required to be taken

out of production (set-a-side) and placed into conserving

uses as part of any annual acreage reduction program that

the USDA may announce, the government now required that (3) participants in the grains program will lose eligibility for deficiency payments on 15 percent of their crop acreage

base. This land may be planted to any crop except fruits and vegetables. While wheat and feed grains planted on this acreage will not be eligible for deficiency payments, they will be eligible for government loans. Triple base was enacted for the savings it produced in the USDA budgetary process and had the effect of transferring much more risk to the farmer. Consequently, as loan prices and market prices were reduced to improve the U.S. export position, the government was forcing the farmer to receive an even greater loss than before. This loss of income had tremendous consequences in the United States, first in rural areas and finally for the nation as a whole. As parity levels for farmers dropped, public and private debt escalated dramatically which according to Wilken's hypothesis was a cause and effect relationship. However, current agriculture

policy has experienced some major successes involving

exports, and to a small degree applied pressure for changes

within the GATT negotiations which need to be examined.

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The primary goal of adding EEP to U.S. agriculture

policy was to increase the volume of exports. Wheat exports did increase dramatically/ growing by about 60 percent in

1987.®° By 1988 the U.S. share of the world's wheat market increased from 28.8 percent in 1985 to an estimated 41.6 percent in 1988. This dramatic shift was partly accomplished

by eliminating the EC's export price advantage. The dumping

policies of the EC would have caused their wheat export

price to be $30-40 per ton lower than the U.S. price if it

were not for EEP which offset this difference by

approximately $33 per ton. An analysis by Kenneth Bailey found that EEP was responsible for about one- third of the increase in wheat exports from 1985 to 1987.®^ The rest

was due to lower loan rates, reductions in yields of competing exporters and increased imports by the Soviet

Union and the Peoples Republic of China. The lower valve of the dollar was also a factor analyzed but the effect was minor. The major positive achievement of the present program is the increase in U.S. export shares, although

adverse weather in both exporting and importing countries must receive much of the credit. Another objective of the present program was to apply pressure on the EC to change

its policy of dumping. The strategy was that EEP would

90Coughlin, DUBIOUS SUCCESS OF EXPORT SUBSIDIES FOR WHEAT, 43.

®^Kenneth W. Bailey, "What Explains Wheat Export Rise?", Agricultural Outlook (July 1988a) 22-25.

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increase the EC's agricultural support program costs to such

an extent that they would be open to changing their policy of dumping during the GATT negotiations. The United States did apply pressure to the EC with their EEP program but how

effective that pressure was, is still open for debate because of some inherent problems pointed out by Coughlin and Carraro.®^ They preface the examination of these

problems by stating that Contrary to a world of perfect competition with many agents each too small to influence the market outcome, agriculture trade policy can be viewed as a strategic environment that can be altered by governmental decisions*^. The United States and the EC are the primary players and

adversarial trade policies by each entity can easily expand into a major agriculture trade war, which is exactly what happened. Rather than cooperatively pursuing agriculture

policy that could be beneficial to both the U.S. and the EC,

they are instead pursuing policies that are harmful to each. Tangermann argues that in attempts to inflict harm on

the EC, the U.S. causes even more harm to itself,®^ He

states that if the U.S. had decreased world grain prices by 10 percent in 1982, that the EC could have maintained its export volume by an increase in its agriculture budget of

®^Coughlin, DUBIOUS SUCCESS OF EXPORT SUBSIDIES FOR WHEAT, 43

®^Ibid. ^^Stefan Tangermann, "The Repercussions of U.S. Agricultural Policies for the European Community" American Enterprise Institute (1985) 329-44

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only 0.8 percent. Paarlberg pointed out that the United States has much larger foreign markets to defend in a trade war.®^ Consequently, Paarlberg estimates that the U.S. would have to out spend the EC by 50 percent just to maintain its market share. In addition, the EC is a major importer of goods from the U.S. and cutbacks would increase

the costs to the U.S. even more if the EC retaliated with import restrictions. The trade war between the U.S. and the EC in agricultural goods and the resulting low world prices has

been strenuously objected to by the Cairns Group, which is

made up of 13 agriculturally oriented nations.®® Oleson

noted that U.S. and EC policies caused the price of wheat to fall, imposing major losses on such grain exporters as

Canada, Australia, and Argentina. These countries question the true motive of the U.S. when its policy makers talk about cooperation through GATT while they pursue a

policy of extreme cut-throat competition prior to enactment

of a new GATT Agreement, These problems have diminished the

major advantage that current U.S. agriculture policy has

®^Robert L. Paarlberg, FIXING FARM TRADE (Ballinger Publishing Company, 1988) .

®®The Cairns Group consists of Canada, Australia, New Zealand, Indonesia, Malaysia, the Philippines, Thailand, Brazil, Uruguay, Argentina, Columbia, Hungary, and Chile.

®^Brian T, Oleson, "World Grain Trade : An Economic Perspective of the Current Price War" Canadian Journal of Agriculture Economics (November, 1987) 502-14.

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achieved in the political arena, which is that high program costs, to both the U.S. and the EC, finally forced them to reach a compromise within the GATT negotiations in December

of 1993. Several problems have been brought forth in the presentation of the advantages gained by current agriculture policy. An examination of the disadvantages of current

agriculture policy expands upon these problems and their consequences.

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Chapter 11 Problems with Present Policy

The major disadvantage of current U.S. agriculture policy is the cost involved. These costs can be measured in

a variety of ways such as explicit costs to the government/ costs to the U.S. farmer, which in many cases were high enough that he lost everything, and loss of income to the

nation. The magnitude of the cost is very large when all

three methods of estimation are employed. Explicit costs of

the USDA's price and income supports (loans and deficiency

payments) reached a record $25.8 billion in FY 1986. Then

these expenditures declined steadily to $6.5 billion in FY 1990, but rose to $10.1 billion in FY 1991 and $10.6 billion in FY 1992.®® The reduction in budget outlays that took

place from 1987 into the 1990's reflects a decline in deficiency payments due to lower target prices and a further

decline in deficiency payments due to triple base.

Government costs are expected to average approximately $10 billion per year in the future.®® Wheat and feed grains should account for approximately 50 percent of this budget outlay and export programs another 15 percent. These

explicit costs are large, especially when compared to the

parity farm program that the United States had in the 1940s

®®CRS Issue Brief (1992) 2

®®Ibid, 1.

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and early 1950s. Other than the normal administrative cost,

parity programs cost the government nothing and in fact earned 13 million dollars in interest when farmers repaid their loans.Though today's budget outlays are large, they still represent only a portion of the costs to the nation.

Under the current program, farmers in the United States have generally been faced with wheat and feed grain prices that are less than the cost of producing those products.

The government is aware of this condition and consequently

enacted the concept of target prices and deficiency payments

in an attempt to keep America's farmers solvent. Although target prices are generally higher than market prices, especially in recent years, they too are often set below

cost of production. The problem is compounded since farmers only receive a deficiency payment on a portion of their

acreage, 85 percent at most and less if the Secretary of

Agriculture calls for a reduced acreage program. This resulted in over 400,000 farm families leaving the land from 1985 through 1989.^°^ In 1986 the United States lost one

^°°U-S. Representative Harold Cooley, "I Can See Farm Bankruptcy if Price Supports are Removed" U.S. News and World Report (Aug 30, 1957).

^°^Helen Waller, "Reportcard 85 Food Security Act" THE PLAINS TRUTH (November, 1989) 6.

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farm every four minutes. Not only was this loss devastating to these rural families but the small towns which they helped to support were devastated as well. It is unlikely that substantial alternative employment was found in these depressed agricultural areas. Consequently, there has been a migration from rural areas to the metropolitan

centers. These changes in population caused Montana to lose one of their representatives in Congress, which is an

example of the realignment that has taken place in political power. The agriculture sector and rural America will remain depressed as long as low agriculture prices significantly reduce purchasing power. Without adequate income from the

production of raw materials that the earth provides at the beginning of the cycle, it becomes impossible to have full employment, at adequate wages, unless debt is substituted

for the decline in income, according to the philosophy of

the new physiocrats. This is more discernible in rural areas because they see the impact from changes in

agriculture prices very quickly. If Wilken is correct and

the nation's loss in earned income is made up with increased

debt it would be advantageous to construct an agriculture

program that provides proper price and supply parameters to insure fair market prices and adequate incomes for agriculture and the nation.

^°^National Family Farm Coalition (Winter 1990) 80 F Street, N.W., Suite 714, Washington D.C.

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A major proposal was presented in 1990 that would have changed the direction of the 1985 farm bill. Many farm groups such as the National Save the Family Farm Coalition, National Farmers Union and the American Agriculture

Movement, which are composed of family farm members,

demanded legislation that would save the family farm. Thus,

the Family Farm Act of 1990, sometimes referred to as the Harkin/Gephardt Bill was introduced. To correct the problem

of low income for family farmers this proposal would have set price supports on program crops at 75 percent of parity, as established by the USDA, with a 3 percent per year

increase, up to 90 percent parity. The supply management mechanism employed restrictions on bushels sold per farmer rather than acres planted. These bushel quotas were

presented as marketing certificates where the greater the farm's production, the smaller the percentage of marketing

certificates issued. Farmers were to participate in a producer referendum which would determine whether they were

willing to accept this agreement to restrict their sales for a better market price. A 51 percent affirmative vote would

require a mandated program with full compliance. Trade must

also be considered since the United State's grain market is

dependent upon the export market as well as the domestic

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market. It does not benefit the U.S. to have a supply

management program if other countries do not/ and consequently, increase their exports at the expense of the United States. Therefore, the Family Farm Act of 1990 instructed the Secretary of Agriculture to conduct trade

negotiations with other major exporting nations, to achieve international commodity agreements which would ensure that

the U.S. and other exporting nations retain their fair global market share as defined by GATT and that export

prices remain equal to or above costs of production of the

exporting nations. The proposal further states that if the

Secretary is unable to negotiate such agreements within a

reasonable period of time, no more than twelve months, then export restitutions such as bonus bushels or marketing loans, shall be authorized to maintain the U.S. market share at a level equal to the rolling average of the previous five years. A concept of using bonus bushels would be very similar to the U.S. export enhancement program used today.

To solve the problem of insulating a grain reserve to keep

it from depressing market prices the bill proposed a Food Reserve Coordinating Agreement to be negotiated through GATT. In conjunction with this agreement the U.S. would have a farmer commodity reserve. Commodity Credit Corporation grain that the government currently owns would

be the initial deposit in the farmer commodity reserve.

Farmers would be allowed to draw on this reserve in adverse

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years when their production is less than their marketing certificates and add to it when the reserve needed to be increased. Agreements between exporting countries must stipulate that all reserve grain be isolated from export

dumping. This program would have moved the nation much closer toward parity and the philosophy of the new physiocrats, however, the legislation failed to pass.

The 1985 Farm Bill was known as the Food and Security Act of 1985 (FSA-85). A little over a year after FSA-85 became law, an independent analytical group called the Food

and Agriculture Policy Research Institute (FAPRI) compared

that program with one similar to the Harkin/Gephardt Bill.

FAPRI is sponsored by Congress and the Universities of Missouri and Iowa State and does not endorse or denounce any particular farm bill. A large scale econometric model of the United States and international agricultural economies

was used in their analysis. Their general economic outlook

was based on a world forecast provided by Wharton

Econometric Forecasting Associates of Philadelphia. The

program that they compared to the Food Security Act of 1985 was called the Commodities Supply Management Program (CSMP). CSMP differed from the Harkin/Gephardt Bill by setting

support prices at 71 percent of parity in 1987 to be

escalated by 1 percent per year to a maximum of 80 percent

of parity, whereas, the Harkin/Gephardt Bill started at 75

percent of parity with increases of 3 percent per year up to

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a maximum of 90 percent parity. CSMP, like Harkin/Gephardt assumes a cartel arrangement is established with major competitors in the world market to insure current levels of trade shares at the higher support prices. Also assumed is

the implementation of tariffs for wheat and feed grains to prevent foreign markets from undercutting the domestic agricultural sector. CSMP was evaluated over the ten year period of 1986 through 1995. FAPRI concluded that net farm income would average $4 6.3 billion with CSMP versus $25.4

billion under FSA-85, an average increase of 82 percent. The increase would have been even more dramatic with the

Harkin/Gephardt Bill due to higher support prices. Further, the model indicated that farm income would decline at the end of the projection period for FSA-85 but increase through the 1990s with CSMP. The model projects $20.9 billion more farm income per year with the Commodities Supply Management Program. If the trade-turn is 7, the nation earns $14 6.3

billion more income per year. These figures would be more

dramatic if the model had calculated the difference when 90 percent of parity is reached. Legislation that raises support prices towards 90 percent of parity would move the

U.S. farm program closer to the desired goal of economic

stability for farmers. If the program is targeted toward family farms as the Harkin/Gephardt Bill was, then family

farmers gain the most. Not only do family farmers gain

increased economic stability, but the nation's consumers do

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as well through the affect of the trade-turn. However,

there are both government and consumer costs that must be

considered. Government costs for the mandatory production control

program averaged $10.3 billion compared to an estimated $15.7 billion under FSA-85. This average difference of 34 percent was even greater during FY-8 9 and FY-90 because government stocks were reduced. In these two years, total cost for commodities is 13.0 billion versus $33.4 billion

for FSA-85. Costs increase near the end of the program as

the government purchases higher-priced grains and oil seeds for hunger programs. The maximum level projected for hunger programs in FY-95 is $6.7 billion. The overall result of legislation along the lines of Harkin/Gephardt dramatically reduces government costs. The FAPRI model also analyzed the impact that FSA-85 and CSMP would have on consumer food

purchases. Legislation similar to Harkin/Gephardt, such as CSMP, would cause total food expenditures to average 7

percent above FSA-85 levels for the 10 year period. This computed to an increase of $33 billion per year at the beginning of the 10 year period and $65.5 billion per year

at the end of the period. Therefore, to gain $146.3 billion additional income per year and save approximately

$5.4 billion per year on farm programs, the nation expends

only $33 billion to $65.5 billion in increased consumer

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costs. The overall effect would benefit the nation between $80.8 billion to $113.3 billion per year. The effect of a Commodity Supply Management Program on the livestock industry was also analyzed. It was concluded that sharply higher feed costs would result in an immediate reduction in the breeding herds for pork and beef. With these substantially lower supplies, prices for beef, pork,

and poultry move upward. The model projected that at the end of the 10 year period, beef prices would be 30 percent

above the FSA-85 level projected for 1995, pork prices 43

percent above, and poultry prices were to rise as well. Another consequence to the livestock industry, that the

model did not analyze, concerns the possible change in who

raises the livestock. Very low grain prices have encouraged tremendous concentration in the livestock industry in recent

years. The mandatory supply management system that

accompanies increased price supports should encourage more livestock to be raised where most of the feed is raised, on

family farms. Consequently, a program of this type also benefits the livestock industry, especially the portion that

is operated by family farms. Another factor that must be considered is whether there

is any affect on inflation. Rising agricultural prices have historically been blamed as one of the causes of inflation.

Regardless of whether agricultural prices have remained

stable or even declined, while nonagricultural items

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increased in price, any future increases in agricultural prices are still condemned, even though they are simply playing catch-up to the rest of the economy. It must be remembered that the new physiocrats believe when the U.S. experienced a decline in earned income, public and private debt was substituted to maintain the standard of living. If the increased debt injection is not reduced when agricultural prices increase then inflation will occur. However, if debt injection is decreased as agricultural

prices rise, the economy will not become overheated, according to this premise. The transition from debt injection to earned income will, however, create a

redistribution of income from the wealthy class, that have

money to lend, to the productive sectors that are generally forced to borrow money when the nation's earned income

declines.

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Original physiocratic thought from the 18th century still forms the foundation for today's proposed parity farm programs. John Stuart Mill's premise that the distribution system is determined by society rather than natural law is the basis for legislating farm programs. The direction that this legislation has taken since the mid 1950s reveals the current rejection of physiocracy. A rejection that occurred without fully examining its original two premises that (1) all new wealth originates with production from the earth and

<2) that the income received for this production circulates through the economy with each successive trade transaction providing income for the nation. Physiocratic thought has represented a minority viewpoint throughout history and even at times seemed to have been completely forgotten. It has,

however, survived and the new physiocrats, rejecting

laissez-faire, present arguments for adoption of its other basic premises into current farm programs. The United

States has the advantage of having actually legislated both

parity farm programs, that generally incorporated physiocratic beliefs, and non-parity programs. Comparisons

between these two basic program philosophies should be

considered when national farm programs are debated every

five years. A similar process is needed to compare a trade

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policy that focuses on cooperation between countries that

provides adequate farm income for each country versus present trade policy which promotes increased competition that exploits the producers in each country and, according

to physiocracy, reduces each nation's income base. Econometric programs comparing parity and non-parity

farm programs must become more comprehensive and include input-output analysis to explore the effect that primary production from nature has on national income. The results

of the econometric model run by FAPRI indicate greater

rewards with parity programs, but more comprehensive research needs to be undertaken.

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Cooley, Harold, U.S. Representative, "I Can See Farm Bankruptcy If Price Supports Are Removed." U.S. NEWS AND WORLD REPORT, Aug. 30, 1957. Coughlin, Cletus C ., Carraro, Kenneth C., "The Dubious Success of Export Subsidies for Wheat." Federal Reserve Bank of St. Louis, Nov./Dec. 1983.

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Elk, Carl, "Agriculture and the Budget." CONGRESSIONAL RESEARCH SERVICE, Library of Congress, Nov. 3, 1992. Family Farm Act 1990, sponsored by Senator Harkin and Representative Gephardt. Food and Agricultural Management Program, "The Commodity Supply Management Program", Center for National Food and Agricultural Policy, Department of Agricultural Economics, University of Missouri, Columbia, Missouri 65211.

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Morgan, Dan, MERCHANTS OF GRAIN, New York: Penguin Books, 1980.

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Tangermann, Stefan, "The Repercussions of U.S. Agricultural Policies for the European Community." U.S. AGRICULTURAL POLICY: The 1985 Farm Legislation, American Enterprise Institute, 1985. Toutz, Robert L. "Legal Parity : Implementation of the Policy of Equality of Agriculture" AGRICULTURAL HISTORY, Oct. 1955.

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